Recently, hydraulic fracturing, or fracking, has come under increased scrutiny. Hydraulic fracturing is a technique that has been used in the oil and gas industry for decades. Recently, oil and gas companies have been using the technique more extensively in connection with horizontal drilling to allow the extraction of natural gas from the Marcellus Shale formation that underlies signifi cant portions of Pennsylvania, New York, Ohio, Maryland and West Virginia (as well as other shale formations). Historically, the Marcellus Shale region has not seen extensive oil and gas drilling. As the use of horizontal drilling and hydraulic fracturing has increased in areas unaccustomed to such activities, environmentalists and various state and federal regulators have raised concerns that hydraulic fracturing could contaminate the groundwater supplies upon which certain communities rely. For example, legislation has been introduced into Congress seeking to have hydraulic fracturing regulated under the federal Safe Drinking Water Act. In the midst of all of the public scrutiny by the environmental organizations and governmental authorities, the SEC has also decided to become involved in the debate, through the comment letter process, and is now seeking increased disclosure from oil and gas companies utilizing hydraulic fracturing.
In recent comment letters, the SEC has sought additional information from issuers engaged in hydraulic fracturing. Generally, the comments relating to hydraulic fracturing are diverse. For example, there have been SEC comments seeking additional disclosure regarding (i) insurance coverage for environmental liabilities that may arise out of hydraulic fracturing and other operations; (ii) violations of environmental laws or claims or lawsuits relating to hydraulic fracturing; and (iii) hydraulic fracturing operations, including identifi cation of locations of where the technique is being used. The most common SEC comments relating to hydraulic fracturing seek additional disclosure regarding the risk that additional regulation of hydraulic fracturing may pose to an issuer’s operations and fi nancial results. There have also been reports that the SEC has been seeking even more information regarding hydraulic fracturing activities, such as the chemical make-up of the fl uids used in the hydraulic fracturing and horizontal drilling process.22
As the comment letters address a diverse group of issues relating to hydraulic fracturing, it is diffi cult to distill and provide any general guidance, with one exception. Any oil and gas company engaging in hydraulic fracturing and horizontal drilling should consider including a robust risk factor and other disclosure regarding the risk that increased regulation of hydraulic fracturing, and litigation involving groundwater claims related to fracking, may have on the company. In addition, as oil and gas companies engaged in hydraulic fracturing prepare their SEC fi lings, it may be useful for issuers to work with counsel to provide disclosure that addresses concerns expressed in the SEC’s comment letters.